The Present Status and Medium and Long-Term Issues for the Japanese Economy

the Economic Research Dept.

Summary

As the aging of society shifts the population composition toward groups with lower labor force participation rates， the growth of the labor force is slowing down despite the entry of more women， and is likely to begin decreasing eventually. Moreover， since the reduction in labor hours is expected to continue， we expect labor input (number of workers multiplied by work hours) to steadily decline.
We predict that both public and private savings rates will decline steadily in the future. This decline is likely to reduce the rate of investment and thus capital accumulation.
From the supply side， the peaking out of the labor force population accompanying the aging of the population， the decline in savings rares， and slowdown in capital accumulation pace will cause the economy's potential growth rate to decline. However， this rate will not drop sharply in the late 1990s. However， with the economy undergoing structual adjustments due to the aftereffects of the bubble economy and the strong yen， the above factors will restrain demand， so that the economy is likely to have a low growth rate in the medium term.
In the process of adjustment， we cannot deny the risk that the economy will enter a downward spiral and lose its mechanism to recover by itself. What is needed at the present juncture is for the private sector to proceed with restructucturing， and for the public sector to support demand to alleviate deflationary pressures.
In the medium to long term， based on the principle of self-responsibility， deregulation is needed to promote competition in the private sector and increase economic efficiency. The public sector needs to exercise those functions that the private sector cannnot， in particular by actively participating in areas where social returns are higher than private returns.